China’s central bank, the People’s Bank of China (PBOC), has announced a reduction in the amount of cash banks must hold as reserves, a move seen as a timely response to growing pressures in the domestic banking industry and rising risks abroad. State-owned Chinese newspaper, China Securities Journal, hailed the move as a necessary step to support the country’s nascent economic recovery.
According to the PBOC, the cut in the reserve ratio will release about 1 trillion yuan ($154 billion) in long-term liquidity into the economy. The decision comes earlier than expected by financial markets, indicating the central bank’s concern about the potential impact of external risks on the Chinese economy.
The move is also expected to help ease funding pressure on banks, particularly small and medium-sized ones, and support lending to small businesses, which are seen as key drivers of economic growth.
This is the first time this year that the PBOC has cut the reserve ratio. The last time the bank reduced the ratio was in April 2020, as part of measures to support the economy hit by the COVID-19 pandemic.
The PBOC’s decision comes as the Chinese government has been ramping up efforts to support economic growth, amid concerns over slowing momentum in the world’s second-largest economy. China’s GDP grew by 2.3% in 2020, its slowest pace in more than four decades, as the country grappled with the pandemic.
The central bank’s move to cut the reserve ratio is expected to complement other measures, including fiscal policies, such as tax cuts and increased government spending, aimed at boosting consumption and investment.
The move also comes amid growing concerns about inflation, which could be fueled by the influx of liquidity into the economy. However, the PBOC has downplayed the risks, saying that it will maintain a “prudent and neutral” monetary policy stance and keep liquidity at an appropriate level.
In conclusion, the PBOC’s decision to cut the reserve ratio is seen as a necessary step to support the country’s economic recovery amid growing pressures and risks. The move is expected to release liquidity into the economy and ease funding pressure on banks, particularly small and medium-sized ones, and support lending to small businesses, which are seen as key drivers of economic growth.